Shanghai slumped 2.96 percent, or 82.04 points, to 2,688.75, its worst single-day percentage fall since January 17, after a fatal high-speed train crash led to a sell-off in rail firms.

With just over a week to go before the US runs out of money to repay its debt, President Barack Obama and his Republican opponents remain deadlocked on talks over a deficit-cutting budget that will allow for more borrowing.

As the August 2 deadline to raise the country’s $14.3 trillion debt limit looms, there are fears that a default by the world’s biggest economy will send shudders through world markets that could lead to another global recession.

Obama has described such a scenario as “Armageddon”.

However, the two sides are unable to agree on a budget, with the Republicans adamant that savings must come solely from cost-cutting with no tax rises, while the Democrats want some tax rises for the rich and corporations.

There had been hopes last week that a deal was close when Obama threw his weight behind a tentative plan.

But the crisis deepened over the weekend when the man leading Republican negotiations, John Boehner, refused to return calls to Obama, saying that the White House had shifted the goalposts and had made fresh tax-raising demands.

“With just days to go now before the August 2 deadline, investors who had previously written the impasse off as political games are now going to seriously consider the possibility of a default,” GFT Global Markets director of global dealing operations Martin Slaney said.

However, despite rising concerns, many traders expect Republicans, Democrats and the White House will reach an agreement to avoid a default.

Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole CIB, told AFP:
“With a week still to go, I think the general sentiment is that there could be many solutions. I expect a deal could be reached before August 2.”

And IG Markets chief market strategist Ben Potter told Dow Jones Newswires: “We’re still of the view that the ‘too big to fail’ attitude will mean the debt ceiling is raised.”

But he added that it was “becoming more evident that it’s going to take longer than expected and that one side is probably going to have to give up more ground than they had wanted”.

US Secretary of State Hillary Clinton mirrored those sentiments on a visit Monday to Hong Kong, where she said she was “confident that Congress will do the right thing and secure a deal on the debt ceiling”.

On currency markets, the dollar fell as low as 78.12 yen in early trade, the lowest level since March 17 when the greenback slid to the 76-yen range, leading to the intervention.

It recovered to 78.40 yen in afternoon Tokyo trade against 78.52 yen in New York late Friday.

The euro initially slipped after Moody’s downgraded Greece’s debt rating further into junk status after last week’s eurozone deal to bail out the troubled country.

The agency said the plan, which could see Athens in “selective default”, set a dangerous precedent for other nations that face trouble in the future.

The single currency was at 112.38 yen, against 112.69, while it edged up to $1.4374 from $1.4357.

Shanghai stocks was the biggest regional loser as traders fretted leaders would cut back on infrastructure investment due to safety fears after a high-speed train collision Saturday that left 36 dead.

“The market has been expecting investment growth to recover in the second half, but the latest accident may prompt the government to overhaul infrastructure projects and slow the pace of investment,” Sinolink Securities analyst Xu Wei said.